Can Enterprise Products Partners Save Your Retirement?

Can Enterprise Products Partners (EPD -0.41%) save your retirement? The short answer is no, but it can sure help.

The news on Americans and their retirement savings remains the same: They haven't saved enough and will likely work longer or live less comfortably than they expected. A sad situation, but not an inevitable one. With proper savings and investment, retirement can be enjoyed. It helps to know where to invest your money.

One big opportunity for Americans is the master limited partnership. These entities tend to pay significant distributions (the equivalent of dividends paid by a corporation) to their investors. The growth of the US energy industry has created some wonderful investment opportunities, and Enterprise Products Partners is one of them.

Why Enterprise?
Enterprise exploits a simple fact: crude oil and natural gas are no good until they reach a customer. Enterprise operates a network of assets that connects the oil and gas fields to customers such as refineries. These assets include onshore and offshore pipelines, tankers for both inland and coastal waterways, and storage and processing facilities, particularly for natural gas and natural gas liquids.

One reason Enterprise can help your retirement is its distribution growth. The current payout is $2.88 a unit on an annualized basis. The most recent distribution represents the 40th consecutive quarter in which Enterprise increased its distributions. The current yield is just under 4% -- which is not to minimize the performance of the stock, which has increased over 22% in the past year, and 178% over the past five years.

Another virtue for Enterprise is its safety. The company's distributions have enjoyed a coverage ratio of 1.2 or higher since 2010, meaning the company is retaining cash to invest in the business and to provide a buffer for distributions should there be a downturn in its revenues. Another measure of safety is its ratio of debt to adjusted earnings before income tax, depreciation and amortization, or debt/EBITDA. Typically, a ratio of 4.0 or lower is considered safe; for the past three years, Enterprise has a ratio of 3.5 to 3.6.

Perhaps the most compelling reason to invest in Enterprise is its growing business. Arguably the biggest potential driver of revenues is the export of petroleum products. Enterprise already exports propane, recently started exporting ethane and should export gasoline later in 2014. The big export news came last month when Enterprise and Pioneer Natural Resources received approval to export a very light grade of crude oil called condensate. No other company has approval to export this commodity. In a nutshell, Pioneer will produce condensate and Enterprise will get it to the export market.

How about competitors?
Enterprise certainly holds no monopoly on pipelines or other midstream assets. One competitor is Magellan Midstream Partners (MMP). The company operates pipelines and other midstream assets in the United States. Unlike Enterprise, Magellan focuses heavily on the transportation of refined petroleum products. Smaller operations include crude oil transportation, storage of refined products and, to a lesser extent, ammonia. The company deals in natural gas liquids, but not in natural gas per se.

Magellan boasts an even longer track record of distribution growth: 48 consecutive quarters of increased distributions with a current yield of about 3%. The company projects distribution growth of 20% for 2014 with a long term distribution coverage ratio of 1.1. Short term, the ratio will be closer to 1.4. The stock is up over 50% for the past year, up over 300% for the past five years. Debt is certainly not a problem with its debt/EBITDA typically below 3.0 over the past 10 years.

So why not Magellan? The company is smaller, roughly a quarter the size of Enterprise by market capitalization. Unlike Enterprise, Magellan has no direct exposure to the energy export market. No doubt Magellan's pipeline expansion into the Permian Basin of Texas will improve revenues, but the export market for such products as propane, gasoline, and ethane is potentially huge. Enterprise is well positioned to capitalize on these exports. Magellan is not.

Lastly, Enterprise is, by one metric, a cheaper investment. For master limited partnerships such as Enterprise or Magellan, one way to measure value is the ratio of price to distributable cash flow. An average ratio is around 16. For Enterprise, the ratio is 18.3, while Magellan comes in at 23.1. So while Magellan offers lower debt and faster growing investment, you pay for it up front.

Final Foolish thoughts
Both of these companies offer investors a growing distribution for retirement income. Enterprise offers retirees the safety of size and diversity compared to Magellan. Enterprise also offers investors a way to benefit from growing exports of American energy. Which is not to say Magellan is a bad or risky investment; just that for the combination of safety and growing income, I'd go with Enterprise.